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Trending Topics in Contract Auditing Presenters: Allen Devine, Senior Manager Dan Smith, Manager Government Contracts Slide 2 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. NDPPS 227476 2 Objectives Our objective today: Provide trending insights into contract auditing topics Discuss your questions and comments through out the presentation Slide 3 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. NDPPS 227476 3 Outline Well discuss the following topics: Internal policies and procedures Contract Set Up Subcontract Management Terms and Conditions Slide 4 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. NDPPS 227476 4 Internal Policies and Procedures High level contracting cycle: Each phase requires policies and procedures. What phase have you seen? Be mindful of each phase during the audit process. NegotiationExecutionClose-Out Slide 5 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. NDPPS 227476 5 Internal Policies and Procedures Items within the NEGOTIATION phase: Who are some of the key players in the phase? Sales teams (Customer contracts) Purchasing teams (Vendor contracts) Reviewers (Legal/Insurance, Risk, Political) How much authority are these individuals given? Sales/Purchasing limits Ability to change or accept terms Who can bind the entity? Slide 6 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. NDPPS 227476 6 Internal Policies and Procedures Do you have defined roles and responsibilities? Who does what? And how? Sales/Purchasing teams Understand how much authority is delegated to the teams Test executed contracts for compliance with that authority Reviewers Understand policies for required reviews. Legal Review What can we live with? Risk Management Review Should we live with it? Political Review Organizational Conflict of Interest checks (govt contracts) Slide 7 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. NDPPS 227476 7 Internal Policies and Procedures Items within the EXECUTION and CLOSE OUT phases: Who are some of the key players in the phases? Delivery team Contracts team What are some important considerations Complying with contract provisions Finalizing delivery and acceptance Slide 8 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. NDPPS 227476 8 Contract Set up: Key Elements Entities should maintain sufficient documentation to support requirements of the contract Contract Brief Should list all those elements that are critical for execution and compliance of the contract Typically one or two pages Key elements are clearly stated Unique requirements are listed out Executed contract Internal approvals documents Key contacts and personnel Slide 9 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. NDPPS 227476 9 Contract Set up: Key Elements Entities should maintain sufficient documentation to support requirements of the contract, continued Budget Distribution Document For contracts that contain complex funding or operating requirements Lists out key sources of funding and expectation of use Resource commitments at various phases Timeline/Schedule Document Key milestones and deliverables Electronic or paper storage controls Change management Retention policies Slide 10 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. NDPPS 227476 10 Subcontract Management Subcontracts have been an area of risk Subcontracts should have the same management process as the prime contracts Negotiation, Execution, Close-out Approval of terms and conditions Key issues with subcontracts Flow down provisions from prime contract Guarantee of delivery Ability to terminate Close out of Subcontracts Necessary to close out prime contract Slide 11 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. NDPPS 227476 11 Terms and Conditions Terms, Conditions, and Certifications Terms should be reviewed by Legal counsel Binding agreements Conditions to performance must be maintained during execution of the contract Is the delivery team complying? Certifications of the entity Words have meaning! Slide 12 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. NDPPS 227476 12 Terms and Conditions Terms and Conditions that can have big impacts: Pricing Providing most favored or lowest rate Liquidated Damages Hidden cost to deliverables Invoicing Milestones Payment dependencies Limitation of Liability and Indemnification Does the risk of the contract match the reward Slide 13 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. NDPPS 227476 13 Terms and Conditions Some terms that have caused issues, continued: Schedules and Milestones Reasonable deadlines Dependencies Termination Ability to cure IP rights What do we own? What will they own? Contract Type: T&M, Cost Reimbursable, Fixed Price Slide 14 Questions and Concluding Remarks Questions? Slide 15 Questions and Concluding Remarks Thank you for coming! Slide 16 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. NDPPS 227476 The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International